Inflation, rising rates and mounting indications of a recession present challenges and opportunities for CareTrust REIT and its operating partners, President and CEO Dave Sedgwick said in discussing the San Clemente, CA-based company’s second-quarter operating results.

“These extraordinary times of rising borrowing rates could result in price moderation for assets and tip the scales to buyers like us who present more certainty to close in the coming quarters,” he said in a statement. Recessionary cycles historically have had a net benefit for the skilled nursing sector because labor tends to “loosen” while demand remains unaffected, Sedgwick added.

The real estate investment trust issued a press release Thursday and hosted a call for analysts on Friday. 

‘Thrilled’ with debt investment

Chief Investment Officer Mark Lamb said that CareTrust was “thrilled” with its debt investment of $100 million during the quarter, “because it allowed us to strengthen our relationship with one of the premier operators in the eastern states while also providing a longer term than usual for the mezzanine part.”

Aug. 1, he noted, CareTrust invested $22.3 million with an existing operating relationship in California, and he cited the same advantages.

“Our primary focus continues to be growth through acquisition, and we are encouraged by these bread and butter growth opportunities returning to the market,” Lamb said.

Portfolio optimization continues

The company’s work to optimize its portfolio continues, Executive Vice President James Callister said.

“We are in the process of negotiating [letters of intent] or purchase agreements on the skilled nursing and seniors housing assets we have brought to market,” he said.

In some cases, the company is pursuing parallel paths of selling and re-tenanting, Callister said, adding that some of the assets held for sale could be retained and re-leased.

“We remain on track to close and wrap up much of the disposition work by the end of [the fourth quarter],” he said during the earnings call.

On recent earnings calls, such as its fourth-quarter 2021 and first-quarter 2022 calls, CareTrust REIT executives have talked of plans to diversify by investing in the behavioral health business, including converting some underperforming assisted living communities in its portfolio into residential addiction recovery centers.

Friday, Sedgwick said that the REIT’s current investment pipeline does not include behavioral health properties, but that CareTrust remains interested in the property type.

“We do expect to continue to pursue behavioral health investments,” he said, adding, “Like in skilled nursing and seniors housing, having a great bench of operators will be critical to be able to grow that asset class for us.”

Operating results reported

For the quarter, CareTrust reported that:

  • 93.9% of contractual rents were collected.
  • Net income was $20.7 million and net income per share was $0.21.
  • Normalized funds from operations were $35.6 million, a 0.7% decrease over 2021, and normalized FFO per share were $0.37.
  • Normalized funds available for distribution were $37.5 million, a 1.7% decrease over 2021, and normalized FAD per share were $0.39.
  • A quarterly dividend of $0.275 per share represents a payout ratio of approximately 71% on normalized FAD. On an annualized basis, the payout ratio was approximately 74% based on second quarter 2022 normalized FFO and 71% based on normalized FAD.
  • Average quarterly occupancy grew by 2.8% for seniors housing properties and 1.4% for skilled nursing properties over the first quarter.

“All things considered, Q2 was a stable quarter for us, and Q3 is starting off much the same,” Sedgwick said.